Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies for the EnterprisingÂ Investor Near 52 Week Lows.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Adobe Systems Inc. (ADBE)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Adobe Systems Incorporated (Adobe) is a diversified software company. The Company offers a line of software and services used by professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring and engaging with content and experiences across multiple operating systems, devices and media. The Company markets and licenses its software directly to enterprise customers through its sales force and to end users through application stores and its Website at www.adobe.com. Adobe also distributes its products through a network of distributors, value-added resellers (VARs), systems integrators, independent software vendors (ISVs), retailers and original equipment manufacturers (OEMs). In May 2013, it acquired Ideacodes LLC. In July 2013, the Company announced the completion of acquisition of privately held Neolane.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â FAIL
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$14.35|
|Value Based on 0% Growth||$8.41|
|Market Implied Growth Rate||29.39%|
|Net Current Asset Value (NCAV)||$0.62|
Balance Sheet – 2/28/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Adobe Systems Inc.Â is noÂ longerÂ suitable for either the Defensive Investor or the Enterprising Investor at this time. Â The Defensive Investor has concerns with the low current ratio, lack of dividend payments, lack of sufficient earnings growth over the last ten years and the high PEmg and PB ratios. Â The Enterprising Investor is concerned with the lack of dividend payments and lack of growth in earnings over the last five years.Â As a result,Â value investors following the ModernGraham approach based on Benjamin Graham’s methods should seek other opportunities through a review of ModernGraham’s valuation of Microsoft Corp (MSFT) and ModernGraham’s valuation of Apple Inc. (AAPL). Â As for a valuation, the company appears significantly overvalued after seeingÂ its EPSmg (normalized earnings) fall from $1.22 in 2010 to only an estimated $0.99 for 2014. Â This demonstrated drop in earnings clearlyÂ does not support the market’s implied estimate of 29.39% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula,Â to return an estimate of intrinsic value belowÂ the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Adobe Systems Inc. (ADBE)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Be sure to review the previousÂ ModernGraham Valuations of Adobe Systems Inc. (ADBE)!
Disclaimer: Â The author held a long position in Apple Inc. (AAPL) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.